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Friday May 4, 2007 - 22:37:10 GMT
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Market Directions Sunday May 6, 2007

The Week in Review April 30 – May 4

It was an inconclusive end to a week that initially contained much promise for the Dollar. The Friday Non Farm Payrolls number, 88,000 on expectations of 100,000, could not sustain the positive dollar momentum generated by the two ISM numbers and the US Factory Orders report earlier in the week. The Usd move higher against the Euro was checked at 1.3550 which had been reached in confused trading immediately after the NFP. But the question has been raised, is a manufacturing sector dollar rally around the corner?

Recent secondary statistics have demonstrated unexpected resilience in the US economy.
Last week’s Durable Goods Orders for March at 3.4% was more than 50% higher than the forecast of 2.2%. In addition, February’s number was revised higher by 40% -- 2.4% vs. 1.7%. The April Manufacturing ISM Index at 54.7 surprised traders with the strongest reading since mid last year. March Factory Orders were 3.1% higher than February and 55% ahead of the market expectation of 2.0%; it was the best reading in this series since last June. Despite the ongoing housing slump the American consumer has never left the economic lists. Retail Sales in March (released April 16) improved 0.7% over February and that was the best result since December 2006. Consumer sentiment readings have stayed at or above their five year averages for the past six months and job creation has dipped only slightly. It has not been a lack of consumer spending that produced a weak 1.3% GDP growth rate in the first quarter. It remains to be seen if the scheduled two revisions to this ‘advanced’ GDP number will hold to this anemic growth level. The potential for upward revisions in GDP cannot be ignored, particularly in light of these recent numbers and the known volatility of this statistic.

It has been business spending and investment, or the lack thereof, and the decline in the housing sector that have put a worrisome cast on economic projections for the US economy. If business investment returns to the levels of early last year then even with housing in the doldrums, there is potential for the American economy to return to trend growth of 3% and more. If the economy recovers will the dollar be far behind? But we should not get too far ahead of ourselves. Last December these same secondary indicators presaged a month long Dollar recovery in January that ended when US economic statistics again turned south.

The Euro has been unable to make a clear break above its historical highs for more than two weeks. At this point in the four month Euro rally two considerations are unavoidable: first, many traders are thinking about securing their profits; second, the Euro is on the cusp of several indicators, including a potential triple top with three successive lower daily closes, that could precipitate large technical selling.

Eurozone statistics showed what may be the first effects of the higher Euro. Manufacturing growth was steady in April across the four largest economies, Germany, France, Italy and Spain. But given the recent strength in business sentiment, especially in the Eurozone's largest economy, Germany, which has been at record levels, most analysts had expected an increase. New Orders slowed to the weakest pace in 15 months. Even the unemployment rate which shrank to 7.2% in the harmonized Eurozone reading, a new low, does not necessarily foretell boom times ahead, unemployment being a trailing indicator.

Economic Releases April 30 - May 4, 2007

United States

A week of almost unvaried good news on the US economy began first thing Monday morning with Chicago Purchasers Index for April. The March issue for this Chicago area version of the national survey at 61.7 had been an outlier among the generally mediocre ISM reports last month. The April Index at 52.9, though a bit under the forecast of 54, set a mark for improving economic growth that was matched throughout the week. The nationwide Institute of Supply Management Survey (ISM) for manufacturing bested predictions at 54.7, 51 had been forecast; the March figure was 50.9. Particularly impressive was the new orders component which at 58.5 was far ahead of the March reading of 51.6. The ISM survey has a 67% correlation with GDP year to year and this number gives credence to the possibility of a gathering rebound in manufacturing Euro dropped 70 points against the Usd and Usd/jpy rose 70 points within 15 minutes of the release. Thursday's non-manufacturing ISM for April clocked in at 56, well ahead of the forecast of 53.5 and the March result of 50.8; new orders were 55.5 also well in advance of the March result of 53.8. The improvement in new orders took place despite the continuing housing and housing finance corrections. The employment survey improved as well, registering 51.9 in April as opposed to 50.8 in March.

The preliminary first quarter Non Farm Productivity registered a very surprising gain of 1.7%, 0.5% had been expected. The 4th quarter figure was revised upward from 1.6% to 2.1%. The rise in Unit Labor Costs for the 1st quarter unexpectedly faltered climbing only 0.6% when 3.9% had been predicted; the 4th quarter 2006 number was adjusted lower to 6.2% from 6.6%. On the face of it these numbers seem hard to credit as wages and salaries rose 9.5% in the quarter and the advanced GDP number was only 1.3%. Rising wages and shrinking GDP would not seem to correlate with higher labor productivity and lower labor costs. Both statistics will likely change in future releases.

Pending Home Sales for March were down 4.9% at 104.3 and were in line with Existing Home Sales which were off 8.4%, but substantially worse than New Home Sales which rose 2.65%.
Construction spending also recovered in March increasing 0.2% over February and doubling the forecast of 0.1%. Surprisingly for a month of difficult winter weather February was revised higher to 1.5% from 0.3%, a fivefold increase.

The Non Farm Payroll report for April at 88,000 understated market expectations and revisions deducted a total of 26,000 from job rolls for February and March. The unemployment rate rose to 4.5% from 4.4% as expected. This was the lowest monthly job increase since 65,000 jobs were added to payrolls in November of 2004. The April result is well under the first quarter monthly average of 143,000 and if incorporated into 2007 drops the average to 129,000 for the year. The fourth quarter of 2006 averaged 155,000 and the third quarter 185,000. Average hourly earnings for April rose 0.2% less than the forecast of 0.3% and the yearly rate fell to 3.7% in April form 4.0% in March.

EMU money supply growth for March continued its upward momentum. M3 expanded 10.9%, well over the consensus expectation of 9.80% and topping February result of 10.0%. The three month average moved up to 10.3% from February’s 9.8%. It was the fastest annual M3 expansion in 24 years and the fastest monthly increase in eight years.

The Flash HICP inflation number for April was 1.8% year on year as predicted and in line with the March figure of 1.9% and the February’s 1.8%.

The overall EMU Manufacturing PMI for April was 55.4, the expected number was 55.6 and March was 55.4.The German number for the same period was 57.00, expected 57.2 and March 56.9. Unemployment in Germany fell to 7.0% from 7.1%; in France it dropped to 8.7% from 8.8%. All of these numbers are positive for the Eurozone countries but there was a sense of disappointment with the results after the uniformly strong recent levels of business and consumer sentiment on the continent.

Most European markets except in the UK were closed Tuesday for the May Day holiday.

The Week Ahead May 7 – May 11

United States

A relatively thin week in American statistics begins on Wednesday with the Federal Reserve Open Market Committee (FOMC) meeting in Washington D.C. The FOMC statement will not produce any changes in rate policy, nor is it likely to indicate any alteration in the Federal Reserve view of inflation and the risks to economic growth. The most recent American statistics give a picture of a moderately growing economy with steady consumer spending and an incipient revival in business capital expenditures. This is not a picture to overtly disturb Fed Chairman Ben Bernanke.

The US International Trade Balance for March is out on Thursday. It is expected to widen to $60.1 billion after narrowing in the previous two months. Oil price increases should boost imports more than enough to offset gains from aircraft sales. The trade gap was $59.2 billion in January and $58.4 billion in February.

Retail Sales and Core Sales for April are released on Friday. Both figures are predicted to be 0.4%; the ranges of estimates are from flat to 0.8% for Retail Sales and -0.1% to 0.7% for the core number.

Only one statistic of note will be released this week in the currency union. The Organization for Economic Cooperation and Development (OECD) Leading Indicators for March are issued Thursday. The result for February was 109.3


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